Filed Under:Agent Broker, Agency Management

Florida’s Fragile Property Insurance Market

Did the 2011 Legislature Do Enough to Fix It?

The 2011 legislative session was, according to seasoned insurance industry professionals, the most active in the past 30 years—especially in the property insurance arena. Bills dealing with sinkhole reform, replacement cost reform, and Citizens Property Insurance Corp. were at the top of the to-do list for committees overseeing the insurance statutes. Though the problems and appropriate solutions seemed clear to the industry, lobbying groups representing other interests (primarily public adjusters and their trial lawyers) did their best to undermine efforts to stabilize the market. Despite their actions, some positive changes were made.

Sinkhole Claims Insanity
Throughout the 2011 legislative session, heated discussions centered on the proliferation of sinkhole claims and the reluctance of insurers to provide the coverage, citing the explosion of claims filed by policyholders who are, for the most part, encouraged to do so by unscrupulous public adjusters. While the 2005 law changes make filing these claims perfectly legal, they are the very claims contributing to Florida’s sinkhole claims insanity.

Karyn Roeling, principal of Tampa’s Seibert Insurance Agency, whose home and offices are in Florida’s sinkhole alley (Pasco, Hernando, and surrounding areas) said, “I am saddened to see what has happened to our part of Florida. The billboards advertising for legal services, the door knockers seen blanketing neighborhoods, and the brazen attitude of the area’s public adjusters who prey on the fears of our residents is appalling. And to think that Florida’s 2005 sinkhole law changes have perpetuated this insanity.”

The problem has been on everyone’s radar for several years. A 2010 data call by Florida’s Office of Insurance Regulation (OIR) revealed that sinkhole claims have increased nearly 1,200 percent since 1999. The total cost of sinkhole claims from 2006 through 2010 is expected to exceed $2 billion, making them the equivalent of a catastrophe every year.

Citizens has become the primary insurer of sinkhole peril. Its sinkhole claim count averaged 200 per month at the end of 2010; during 2011, that has increased to 500 per month. These additional liabilities and resulting claims are adversely affecting Citizens’ already precarious finances. The carrier is paying out four to six times more in sinkhole claim dollars than it receives in premiums.

The media has characterized the sinkhole claims crisis as “Florida’s sinkhole shakedown” and “a new frontier in fraud.” It is threatening the stability of Florida’s insurance market by threatening the solvency of insurance companies. According to testimony from the OIR during this year’s legislative session, a number of insurers will go bankrupt because of this current crisis.

Attempts to Fill the Holes
SB 408, which finally passed as session wound down and was signed into law by Gov. Rick Scott on May 17, sought to address sinkholes and other property insurance cost drivers.

To combat the sinkhole problem, the bill establishes a definition of sinkhole structural damage that is partially based on features in Florida’s building code. The bill mandates that the policyholder repair damage from sinkhole activity and that the repairs be in accordance with the insurer’s professional engineer’s recommendations. If the repair cannot be completed within policy limits, the insurer must tender the policy limits.

However, lawmakers did not address the sinkhole “tail,” which actuaries estimate is costing the industry over $1.5 billion. Despite efforts to eliminate the mandate requiring insurers to offer sinkhole activity coverage and catastrophic ground cover collapse coverage, policyholders retain the ability to file a claim on an occurrence basis. Therefore, if a policyholder believes the crack in his driveway was caused by sinkhole activity 2 years ago, the new claim may be valid.

Replacement Cost Versus Actual Cash Value
Lawmakers did reverse a 2005 law that dramatically changed the way property insurance claims were paid out in Florida. The 2005 bill added text to Section 627.7011, Florida Statute: “In the event of a loss for which a dwelling or personal property is insured on the basis of replacement costs, the insurer shall pay the replacement cost without reservation or holdback of any depreciation in value, whether or not the insured replaces or repairs the dwelling or property.”

This law change led to a bonanza for people seeking to cash in on Florida’s insurance claims-paying protocol and was a catastrophic mistake.

The evidence is in the numbers. Insurer expenses have been largely steady recently (thanks to 5 hurricane-free years), reinsurance rates have stayed in a narrow band, and taxes and allowable insurer profits have not changed since 2004. However, loss costs per dollar of premium have exploded by 80 percent since the holdback elimination law was enacted. If allowed to advance at its current pace, loss costs will increase another 40 percent by the end of 2012, according to data from Rollins Analytics. 

SB 408 restores the actual cash value/replacement cost value holdback on damage to dwellings and requires an executed contract to perform repairs on the property. On contents, SB 408 provides a two-pronged approach: it allows an insurer to offer coverage either without the holdback, as in current law, or coverage with the holdback, at a reduced premium.

Seeking to address additional cost drivers, the bill also establishes a three-year claim-filing deadline for hurricane and windstorm claims from date of event. Importantly, it places restrictions on the activities of public adjusters, including contract mandates, restrictions on compensation, and limitations on advertisements and solicitation.

Into the Future
Prospectively, SB 408 should eliminate or defuse cost drivers enough to resuscitate the private carrier market from a severe adverse trend in non-catastrophic loss ratios. Florida Association of Insurance Agents President and CEO Jeff Grady went so far as to declare the session “absolutely a positive experience for the insurance industry.”

While acknowledging some setbacks, Grady said, “We did see progress, especially when one recalls the disappointing vetoes of similar measures by former Gov. Charlie Crist.”

Grady said he believes that most insurers will be “content” with the changes. “I believe most are and they should be,” he said. “It’s no small order to pass any bill that met with such controversy in the Florida Legislature. However, while they are likely grateful, they probably also share the sentiment, ‘It’s about time!’ They have been watching their financial results steadily deteriorate from Florida’s newfound sinkhole epidemic and the populist insurance policies advanced during the term of former Gov. Crist. Two times, a less robust bill than SB 408 was swatted away by Crist vetoes. So yes, I suspect they are happy that progress has been made, but still not satisfied with the scope of the reforms and lawmakers’ failure to rein in Citizens.”

Despite compelling testimony from carrier representatives, industry stakeholders and lawmakers regarding Citizens’ negative impact on market competition, the 2011 session did not produce meaningful reform for the state’s largest property insurer.

That, according to Grady, will mute the impact of this latest legislation. “While our new laws may indeed help existing carriers and perhaps entice potential newcomers to kick the tires, it is still very difficult to see how they can effectively compete with a state-sponsored property insurer that buys virtually no private reinsurance, is tax-exempt, and priced at 40-50 percent below what their own actuaries say is necessary to cover their exposure,” he said.

“Remember, there is practically no barrier to entry for Citizens, their coverage is competitive with most private insurers and the company’s claims paying ability is guaranteed,” he continued. “Citizens remains a super-competitor, and that simply works against the tide of private capital formation in our state.”

Don Cronin, president and CEO of United Property & Casualty Insurance Co. in St. Petersburg agreed that, “Overall, the session was a good first step in the process to reform the property insurance market. While I don’t believe there was enough change at this point to attract new capacity, I do believe prospective companies will now pay closer attention to the impact these changes have, and after a few years, if they stick, investors will come in.” 

Cronin further noted that the changes in the statute of limitations, the public adjuster reforms, and the improvements to the replacement cost laws will have a positive impact, although how much remains to be seen. “We wait with positive anticipation,” said Cronin, a seasoned industry veteran.

Grady also expressed optimism for future reform in areas that met with defeat this session. “Although Citizens, PIP and bad faith reform proposals did not pass, their failure was in no way due to a lack of need—it was about where these items rank as priorities within both the legislature and the industry,” he said. “In the end I believe they will ultimately find legislative success.”

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